Another blow-up shows why it’s buyer beware for Nordic junk debt

The least corrupt countries in Europe are home to its most dangerous bond market. Debt issued in Nordic nations requires no credit rating or due diligence. Companies can claim more or less what they like when selling new debt, according to Norway’s financial-market regulator.

Investors are re-learning the oldest maxim in the book — buyer beware — with the 350 million euros ($433 million) of junk bonds sold in August by Lebara Group BV, a Netherlands-based provider of international mobile-phone cards. “In Nordic high yield you can easily think you’re buying a Ferrari and it turns out it’s not,” said Evgeny Artemenkov, a high-yield money manager at Saastopankki in Helsinki, which bought some of the notes. “The bond was issued using different numbers from what should have been used.”
The debt has since cratered more than 30 percent as Palmarium, the little-known private fund that used the bond proceeds to finance its purchase of Lebara, restated its accounts four times in six weeks. They called it a “genuine mistake.”

The absence of rules has attracted companies the world over, making the Nordics the Monaco of junk bonds. Norway alone, which Transparency International ranks as the cleanest country in Europe after Denmark and Finland, churns out up to eight times more high-yield debt than European Union nations, measured as a share of its economy, according to financial-industry association Finans Norge.

The Nordic model stems from the 1990s, when borrowers tapped local syndicates for small sums, typically eschewing formal terms and conditions. Next came foreign issuers, attracted by skipping the costly legal and due-diligence checks required in London and New York. Fitch Ratings Ltd.’s junk-bond specialist Ed Eyerman warned four years ago that the expansion was “testing its limits.” Locals are now waking up, said Per Fossan-Waage, director at the Norwegian branch of accountants PwC.

“When you take this market beyond Nordic companies, that are not as transparent or are bigger, taking at face value what a company says may be a problem,” Fossan-Waage said. “The Lebara case may show the limits.”


Pareto Deals

The Lebara bond sale was arranged by Oslo-based Pareto Securities, the biggest high-yield arranger in the Nordics between 2010 and 2017, according to its own analysis. Lebara was the fourth-largest deal it led alone in that period, but not the only money-loser for those who bought it. Pareto’s biggest deals were a combined $1.3 billion of debt raised for oil industry players Oro Negro Drilling PTE and Sea Trucks Group Ltd, which both later defaulted. In January the brokerage helped arrange Norwegian Air Shuttle ASA’s 65 million-euro tap of existing 7.25 percent notes due in 2019, which fell three weeks later when the company said 2017 had been “a mess.”

“We hope the issuer is able to regain confidence,” Pareto executives Inge Edvardsen and Christian Ramm said of Lebara in response to Bloomberg questions, adding that losses for investors were “highly unfortunate.” Pareto encourages private companies marketing bonds to disclose as much information as more-scrutinized public companies, they said. Oro Negro and Sea Trucks were among many energy companies sunk by whipsawing energy prices and there were no disclosure failures regarding Norwegian Air’s bonds, they said. The bonds recovered to face value last week after the owner of British Airways said it was considering a takeover of the discount airline.


Investor Presentation

In an August investor presentation marketing the Lebara notes, Palmarium and Pareto highlighted debt of roughly 5 times earnings, an unremarkable ratio for junk-bond issuers. The real number may be as much as 160 times, according to Credit Suisse analyst Lee Hope. Their pitch “barely discussed” the details of the business and excludes entities where many group costs are booked, Hope said.

Credit Suisse and brokerage Stifel Nicolaus & Co have both identified Palmarium’s reluctance to specify its source of funds or other investments as a reason to stay away from the bonds. Palmarium has said those details are private and defended its marketing practices. Unaudited fourth-quarter figures show that Lebara’s “underlying business performs according to or better than as outlined in the marketing materials,” said Matt Pollard, an external spokesman for Palmarium. “The intention is to discontinue” the money-losing units that weren’t included in the presentation, “either by sale or winding down,” he said.


Accounting Mistake

Lebara, led by Graeme Oxby, the former head of Liberty Global’s European mobile business, came under investors’ scrutiny when analysts questioned the accuracy of quarterly results it filed on Feb. 26. It apologized on March 2 for a “genuine mistake” in its accounts, which had not provided a cash-flow statement or included money-losing units. The bonds resumed a selloff in April when updated filings also had to be corrected less than 24 hours later.

Regulators have already curbed how Scandinavian banks market new debt. In 2016, the European Securities and Markets Authority told the region’s banks that they shouldn’t provide shadow corporate bond ratings, designed to mimic rating agencies. Some brokerages have ignored the directive. “At the end of the day, bond investors need to do their homework,” said Sami Miettinen, a partner at corporate-finance consultants Sisu in Helsinki. U.S.-style rules “would kill the market as the cost and complexity would become overbearing.”


Nordic Trustee

At least Lebara’s investors have a good chance of recouping losses if its problems worsen because Nordic Trustee, which manages creditors’ rights when borrowers run into trouble, is not shy about intervening, Miettinen said. In 2014 it seized a ship from struggling oil-services provider Oceanografia. Investing in Nordic debt deals “may be slightly riskier but it is not a casino,” said Tony Renzi, a capital-markets partner at U.S. law firm Akin Gump, whose clients include Pareto.

Cautionary tales like Lebara may be good news for analysts. “Questions about corporate governance, ownership profile and accounting have to be asked,” said Gustav Liedgren, whose Nordic Credit Rating AS offers ratings to issuers who have traditionally done without. Investors need “an independent analysis going deeper than marketing materials.”

Sources and photo-credits: Bloomberg with assistance by Luca Casiraghi